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Fuel Subsidy Pass-Through and Market Structure: Evidence from the Renewable Fuel Standard

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  • Gabriel E. Lade
  • James Bushnell

Abstract

The Renewable Fuel Standard (RFS) is among the largest renewable energy mandates in the world. The policy is enforced using tradeable credits that implicitly subsidize biofuels and tax fossil fuels. The RFS relies on these taxes and subsidies to be passed through to consumers to stimulate demand for biofuels and decrease demand for gasoline and diesel. Using station-level prices for E85 (a high-ethanol blend fuel) from over 450 retail fuel stations, we show that pass-through of the ethanol subsidy is, on average, complete. However, we find that full pass-through takes four to six weeks and that local market structure of gasoline stations influences both the speed and overall level of pass-through. JEL Codes: Q42, Q58, H23

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  • Gabriel E. Lade & James Bushnell, 2016. "Fuel Subsidy Pass-Through and Market Structure: Evidence from the Renewable Fuel Standard," Center for Agricultural and Rural Development (CARD) Publications 16-wp570, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    • Handle: RePEc:ias:cpaper:16-wp570
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    3. Luo, Jinjing & Moschini, GianCarlo, 2019. "Pass-through of the policy-induced E85 subsidy: Insights from Hotelling's model," Energy Economics, Elsevier, vol. 84(C).
    4. Li, Jing & Stock, James H., 2019. "Cost pass-through to higher ethanol blends at the pump: Evidence from Minnesota gas station data," Journal of Environmental Economics and Management, Elsevier, vol. 93(C), pages 1-19.
    5. Zhang, Wei, 2021. "California's Climate Policy and the Dairy Manufacturing Industry: How Does a Federal Milk Marketing Order Matter?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 46(3), September.
    6. Yeh, Sonia & Burtraw, Dallas & Sterner, Thomas & Greene, David, 2021. "Tradable performance standards in the transportation sector," Energy Economics, Elsevier, vol. 102(C).
    7. Brandon Schaufele, 2022. "Curvature and competitiveness: Carbon taxes in cattle markets," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(4), pages 1268-1292, August.
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    9. Wardle, Arthur R. & Akhundjanov, Sherzod B., 2022. "Industry Compliance Costs Under the Renewable Fuel Standard: Evidence from Compliance Credits," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322199, Agricultural and Applied Economics Association.
    10. David P Byrne & Leslie A Martin & Jia Sheen Nah, 2022. "Price Discrimination by Negotiation: a Field Experiment in Retail Electricity [“Redistribution through Markets,”]," The Quarterly Journal of Economics, Oxford University Press, vol. 137(4), pages 2499-2537.
    11. Scott H. Irwin & Kristen McCormack & James H. Stock, 2020. "The Price of Biodiesel RINs and Economic Fundamentals," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(3), pages 734-752, May.
    12. Reinhard Ellwanger & Hinnerk Gnutzmann & Piotr Śpiewanowski, 2023. "Cost Pass-Through with Capacity Constraints and International Linkages," Staff Working Papers 23-16, Bank of Canada.
    13. Karel Janda & Eva Michalikova & Luiz Célio Souza Rocha & Paulo Rotella Junior & Barbora Schererova & David Zilberman, 2022. "Review of the Impact of Biofuels on U.S. Retail Gasoline Prices," Energies, MDPI, vol. 16(1), pages 1-21, December.
    14. Christina Korting & Harry de Gorter & David R Just, 2019. "Who Will Pay for Increasing Biofuel Mandates? Incidence of the Renewable Fuel Standard Given a Binding Blend Wall," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 101(2), pages 492-506.
    15. Pouliot, Sebastien & Smith, Aaron & Stock, James H., 2017. "RIN Pass-Through at Gasoline Terminals," ISU General Staff Papers 201702220800001049, Iowa State University, Department of Economics.
    16. Erich Muehlegger & Richard L. Sweeney, 2017. "Pass-Through of Own and Rival Cost Shocks: Evidence from the U.S. Fracking Boom," NBER Working Papers 24025, National Bureau of Economic Research, Inc.
    17. Burkhardt, Jesse, 2019. "The impact of the Renewable Fuel Standard on US oil refineries," Energy Policy, Elsevier, vol. 130(C), pages 429-437.
    18. Swanson, Andrew C., 2023. "The Pass-Through of California’s Low Carbon Fuel Standard Subsidies to Midwestern Grain and By-Product Markets," 2023 Annual Meeting, July 23-25, Washington D.C. 335864, Agricultural and Applied Economics Association.
    19. Swanson, Andrew C., 2022. "Corn, Carbon, and Competition: The Low Carbon Fuel Standard's Effects on Imperfectly Competitive Corn Markets," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322442, Agricultural and Applied Economics Association.
    20. Gabriel E. Lade, 2018. "Testimony Before the U.S. House Committee on Energy and Commerce Subcommittee on Environment," Center for Agricultural and Rural Development (CARD) Publications 18-pb24, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    21. David P Byrne & Leslie A Martin & Jia Sheen Nah, 2023. "Price Discrimination by Negotiation: a Field Experiment in Retail Electricity," Journal of Economic Geography, Oxford University Press, vol. 137(4), pages 2499-2537.
    22. Aldy, Joseph E. & Auffhammer, Maximillian & Cropper, Maureen L. & Fraas, Arthur G. & Morgenstern, Richard D., 2020. "Looking Back at Fifty Years of the Clean Air Act," RFF Working Paper Series 20-01, Resources for the Future.
    23. David P Byrne & Leslie A Martin & Jia Sheen Nah, 2023. "Price Discrimination by Negotiation: a Field Experiment in Retail Electricity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 137(4), pages 2499-2537.
    24. Linn, Joshua, 2022. "Balancing Equity and Effectiveness for Electric Vehicle Subsidies," RFF Working Paper Series 22-07, Resources for the Future.

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    More about this item

    Keywords

    retail fuel markets; E85; renewable fuel standard; subsidy pass-through;
    All these keywords.

    JEL classification:

    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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